Monday, June 9, 2014

Is taxation the binding constraint?

For the new government in Delhi seeking to kickstart the economy, the forthcoming budget will be a litmus test. Lowering corporate tax rate is at the top of the wish list for corporate India. But is taxation a binding constraint on private investment?

The graphics below compare several taxation related parameters for India with that of other countries, and the trends in each parameter for India, China, Brazil, Indonesia, and Mexico.

1. Number of taxes - For countries with similar level of economic development (measured by GDP percapita), Indian firms do not face too many taxes, though when compared to China, Brazil, and Mexico, they pay more numbers of taxes. However, there has been a declining trend in recent years.

2. Taxes paid on procuring goods and services as a percentage of firm revenues - India has among the lowest tax expenditures on purchases of business inputs. Further, it has been declining steadily.

3. Labor tax and contributions as percentage of business profits - Is lower than all its major competitors, except Indonesia. Further, among similarly placed countries, its labor tax contributions are only slightly above the average.

4. Other taxes payable as percentage of business profits - Includes property taxes and other smaller taxes levied by local governments etc, over and above the corporate tax. Though it is just about the average paid by firms in other countries with similar percapita GDP, it is higher than that paid by other competitors.

5.Taxes on profits as a percentage of commercial profits - Is about the same rate as that paid by its competitors (except China), though it is higher than for countries with similar per capita GDP.

6. Effective corporate tax rates - Is about the same as in other developing countries, in fact among the lowest for MNCs. The effective tax rate estimate of 30% for 2014-15 is just fiction.

Obviously, left to themselves, businesses would like to pay no taxes. But the more relevant question is whether business activity is being seriously constrained by high taxes, especially in comparison to our competitors. Maybe there is a case for rationalization of tax administration, so as to make it easier to file and pay taxes, and also bring down the multiplicity of taxes. But there is nothing here that to suggest that taxation is a binding constraint to private investment.